Private Equity & LBO Terms

Why Private Equity & LBO matters in interviews

The majority of buyers in most M&A processes are Private Equity firms. It’s crucial as a banker to understand the math they’re doing on their end in order to correctly value your client. You will be tested lightly on some terms. But having extensive knowledge can stand out in interviews.

Cash Interest vs. PIK InterestPrivate Equity & LBOWhen you take out a loan, you either pay the Interest in either Cash or PIK (Paid in Kind).

Internal Rate of Return (IRR)Private Equity & LBOIRR simply means the annual rate of return for an investment, most commonly used when discussing PE returns.

Leverage and Coverage RatiosPrivate Equity & LBOLeverage and Coverage ratios are important when determining how much debt you can take out.
Leveraged Buyout (LBO)Private Equity & LBOAn LBO is a method of valuing a company for a banker and a method of purchasing a company for a private equity firm.

Money on Invested Capital (MOIC)Private Equity & LBOMOIC refers to the absolute dollar gain of an investment, irrespective of time.

Private Equity (PE)Private Equity & LBOA PE firm is a company that uses debt to purchase a company, hoping to flip it on in 3-6 years at a favorable return.